As if there weren’t already enough problems, if CIT goes into bankruptcy protection, it could spell more doom and gloom for thousands of small and medium sized businesses and their suppliers this holiday shopping season.

CIT provides factoring for hundreds of thousands of retailers. Even with my fancy economics degree, I don’t remember covering factoring, so we’ll take the definition from Wikipedia:

“Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset)[1], not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.”

Or as the NYTimes puts it:

“When small and midsize suppliers ship goods to retailers, they are not paid right away. Yet they need cash to continue producing merchandise. Factors provide the suppliers money until the retailers pay, which can take 30 to 90 days. Factors also guarantee suppliers that they will get paid, even if a retailer to whom they shipped goes bankrupt.”

Make sure to check out the following articles for more info:
NYTimes – CIT Says It Won’t Get More U.S. Aid
FT – Troubled CIT calls for $2bn infusion
And I think Bloomberg summed it up best with: “If CIT were to fail, a chain reaction would be set off that could very well leave retailers with a shortage of merchandise during the crucial holiday season this fall,” Tracy Mullin, president of the National Retail Federation, said in a July 15 statement. “That cannot be allowed to happen at a time when retailers are already struggling to survive the national recession.”